Equity LifeStyle Properties, Inc. (ELS) Q3 2022 Earnings Report, Transcript and Summary

Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties' Third Quarter 2022 Results. Our featured speakers today are Marguerite Nader, our President and CEO; Paul Seavey, our Executive Vice President and CFO; and Patrick Waite, our Executive Vice President and COO. In advance of today's call, management released earnings. Today's call will consist of opening remarks and a question-and-answer session with management relating to the company's earnings release. [Operator Instructions] As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward-looking statements in the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement any statements that become untrue because of subsequent events. In addition, during today's call, we will discuss non-GAAP financial measures as defined by the SEC regulations. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplement information and our historical SEC filings. At this time, I'd like to turn the call over to Marguerite Nader, our President and CEO.

Good morning and thank you for joining us today. Yesterday afternoon, we issued our supplemental and provided additional information about the impact of Hurricane Ian, which made landfall in Florida 20 days ago. Our team members, some of whom suffered personal losses from the storm have worked tirelessly to restore our properties and assist our residents and guests. The results of the clean-up and restoration efforts over the last 20 days are nothing less than extraordinary. We have prioritized the safety of employees, residents and guests as we began the clean-up efforts, in some cases hampered by a lack of utility service. The strength of our infrastructure and the homes in our communities’ in particular newer homes was evident in Florida after the storm. Over the years we have developed a detailed hurricane preparation plan, which includes significant advanced planning. As soon as the storm passes, our property clean-up and restoration efforts commenced. We have a coordinated program including having vendors on call to arrive at communities as soon as the storm passes to mitigate additional damage and return to normal operation as quickly as possible. In just 20 days, we have made significant progress towards cleaning up and restoring our communities. We see the best in our homeowners with neighbors helping neighbors. After the storm, we have seen an increase in customer traffic driven by displaced residents as well as emergency workers looking for a location to spend the winter months. Our teams will continue to work with those impacted to accommodate those customers at our RV parks across Florida. We believe we have adequate insurance subject to applicable deductible to cover the expenses associated with Hurricane Ian including business interruption insurance. The timing of payment under business interruption insurance may result in revenue recognized in subsequent periods; we will have a better estimate of the timing of the proceeds in the coming months. I want to thank the Florida team for protecting our communities and supporting our residents during this time. Patrick will provide additional details on restoration efforts at the conclusion of my comments. Turning to the results for the third quarter, we delivered strong normalized FFO growth of 8.5%. Our MH revenue grew by 5.9%. Over the last several years, we have seen increased demand for owning a home in our property. Our rental pool is at the lowest point since 2010 with 4.3% of our occupancy comprised of rental homes. Our portfolio is comprised of 96% homeowners. This quality of our resident base is important. Following storm events, we see our resident base quickly addressing any damage to their homes caused by the storm. Our RV revenue performed in line with our expectations, with a growth of 8.6% seen in annual revenue and a decline of 2% in seasonal and transient RV revenue. This decline is a result of the decreased number of available transient sites after being converted to an annual site over the last year. Our first time transient customer returning from last year showed a desire to strengthen their relationship with us, with nearly 20% of those returning, coming in annual seasonal or member. Inflationary pressures specifically with respect to utility costs negatively impacted our performance in the quarter. Paul will provide a more detail on the specific drivers for the increase in our expenses. During the quarter, we sold 331 new homes. Over 95% of these new homebuyers were cash buyers. This investment is consistent with our entire portfolio as the vast majority of our residents have made a capital commitment to live in our communities. The commitment from our homeowners results in pride of ownership and a long term resident base. Turning to 2023, we anticipate continued demand into next year within our MH portfolio by the end of October, we anticipate sending 2023 rent increase notices to approximately 51% of our MH residents. These rent increase notices have an average growth rate in the range of 6.2% to 6.6%. For our RV portfolio, we have set annual rates for 95% of our annual sites. The RV annual rate increases have an average growth rate of 7.6% to 8%. Our Snowbird residents and guests are anxious to head back to Florida and Arizona for the season. Our teams are prepared for their arrival and will continue to focus on providing outstanding customer service. I will now turn it over to Patrick to provide an operational update.

Thank you, Marguerite, and good morning, everyone. During the two weeks following Hurricane Ian making landfall, as leverage to Florida visit properties impacted by the storm. Our ELS team members are extraordinarily committed to clean-up and restoration efforts to return the properties. There are pre storm conditions. The majority of our properties suffered limited damage and to the extent they were closed for the storm. They reopened shortly after the storm passed. Several properties that were closer to the center of the storm, suffered damage from high winds and flooding for storm surge. After a storm event the primary clean-up efforts are focused on your debris removal and by prestaging vendors to move in as soon as possible after the storm. Property level response was quickly underway at all accessible properties. Our restoration efforts or properties are hampered by road or bridge access not yet restored to full capacity, and in some cases, partial power or the lack of power at the property. We have six properties where we need some additional time, estimate the timeframe for reopening. Two of those properties are located in areas accessible by bridges, even damages caused by hurricanes, or early access to those properties was when we now have access to those properties from the mainland over restored bridges. Our storm response included ELS teams providing assistance to residents and guests. Bottled water and food were prepared and served by our ELS team, while is coordinating local restaurants, food trucks and resident groups. Through our make a difference program we made donations to groups and organizations supporting our communities. We also work to coordinate with local county and state response on the ground wherever necessary. And for residents who suffered hardship as a result of the storm, our charity consider others provides financial grants for residents and guests through difficult times. We are focused on restoring our properties and in the process assisting members our ELS team, residents and guests of our communities experienced losses from this storm. I'd like to take this opportunity to thank all of ELS team members, especially the property support residents, guests and each other to the challenges of hurricane. I'll turn it over to Paul to offer our results.

Thanks, Patrick. Good morning, everyone. I'll provide a summary of our operating results for the third quarter and year-to-date periods including the driver of our core operating expense growth during the third quarter. I'll also provide some information about the assumptions we use to build our updated guidance model for the full year 2022. I'll close with some comments on our balance sheet and debt market conditions. In our earnings release, we've reported third quarter and year-to-date normalized FFO per share of $0.70 and $2.07, respectively. These represent growth rates of 8.5% and 9% for the quarter and year-to-date periods respectively. Core property operating revenue increased 5.3% and 6.5% in the quarter and year-to-date periods respectively considered prior year. Growth drivers for MH and RV rents were discussed by Marguerite. I'll touch on the drivers for the remaining 20% of our revenue. Membership dues revenue for the third quarter increased 6.1% compared to prior year. During the quarter, we sold approximately 7,200,000 [ph] Trails Camping pass memberships. While membership upgrade sales volume in the third quarter was lower than last year, average sale was more profitable primarily as a result of an average 20% increase in upgrade sale price. Core utility and other income was higher than expected during the quarter in part as a result of utility income that offset higher than expected utility expense. In a moment I'll discuss the elevated increases in utility rates, particularly related to electricity. It continued during the third quarter. Year-to-date, our utility recovery is approximately 44% same rate we experienced in the first nine months of last year. Property operating expenses were higher than expected during the third quarter. I'll note that given the timing of hurricane Ian making landfall at quarter end, we were not able to estimate probable costs to restore affected properties. Therefore we did not accrue expense in the third quarter related to clean-up or restoration efforts. Utility expense was the primary driver of increased expenses in the quarter compared to prior year. Electric expense increased almost 17% compared to last year. The expense increase is comprised of average electric rate increases of 14%, the remainder of the increase caused by increased usage. RV Communities in the south and northeast experienced rate increases ranging from 16% to almost 30%. These elevated rate increases have been implemented by electric utilities, advance notice, making it challenging to predict the impact on our expenses. Our year-to-date core property operating revenue growth of 6.5%, core property operating expense growth of 8.3% attributed to an increase in core NOI for property management 5.3%. I’ll now discuss our full year 2022 guidance updates. As a result of the potential impact of the hurricane on our fourth quarter results, we provided updated guidance for full year 2022 per share, net income FFO, normalized FFO and we withdrew guidance for core revenue expense and operating income growth rates for the remainder of 2022. The full year guidance ranges we provided include various assumptions related to impact from the hurricane. These include possible loss of occupancy, increase in bad debt expense, costs to remove damaged homes held for sale or rental in impacted communities across Florida. We've also made assumptions related to the temporary interruption of operation certainly impacted property, including the six that are currently closed. As we stated in our earnings release, we believe we have adequate insurance coverage subjected to deductibles, business interruption, but we are unable to predict timing or amount of insurance recovery. We're still into gap elements of insurance recovery including business interruption are to be recognized as revenue upon receipt. Before we open the call up for questions, I'll discuss debt markets and our balance sheets. In this period of volatility and broad economic uncertainty, ELS is well positioned with a debt maturity schedule that shows less than 6% of our outstanding debt matures over the next three years, and around 20% of our outstanding total debt matures over the next five years. This compares to an average total debt maturity for REITs of approximately 45% over the last five years. In addition 23% of our outstanding secured debt is fully amortizing there is no refinancing risk. We have no year in our schedule when more than $300 million of outstanding debt matures. Current secured debt terms available for MH and RV assets range from 50% to 75% LTV base from 5.5% to 6% for 10-year maturities. High-quality, age-qualified MH will command best financing terms. RV assets with a high percentage of annual occupancy have access to financing from certain life companies as well as CMBS lenders. Life companies continue to express interest in high-quality communities, some have set limits on capacity and pricing. We continue to place high importance on balance sheet flexibility and we believe we have multiple sources of capital available to us. Our debt-to-EBITDA is 5.2 times and our interest coverage is 5.7 times. The weighted average maturity of our outstanding secured debt is almost 11.5 years. Now, we would like to open it up for questions.

[Operator Instructions] First question comes from Michael Goldsmith with UBS. Your line is open.

Good morning. Thanks for taking my question. Can you talk about the -- good morning Marguerite, can you talk about the thought process that's behind the MH rent increases of 6.2% to 6.6%? That kind of falls short, where of where inflation has been trending through the year and more and more recently, so what factors would keep the rent growth below inflation at this time?

Sure, Michael, I think Patrick can walk you through our methodology. It’s a process that we go through every year and then arrive at a number in September and October. So maybe Patrick can take you through that.

Yes, so as we as we move towards the back half of the year, and are preparing for our annual budgets, we work through market surveys that includes comparable MH properties as well as alternative housing in the sub markets around each one of our properties and we come up with a recommended rate increase. I'll speak to Florida is about half of the portfolio. And there's a statutory process in place where the owner of the community sit down with the HOA and the community. They come with their view of the process that I just described, and we walk you through it and discuss the and the respective views on the market and settle on a rent increase going forward. That also includes as well as on an on-going basis conversations about our properties with respect to our homeowners priorities, where do they want to see improvements, changes in things like activities, so that we're all on the same page with respect to the long term operations of the property. Just with respect to the overall mix of the rate increases, we have market rate increases across the portfolio, that's about half of our overall rate increases. To your point, I would expect that that would approximate CPI, although it's going to be driven by market forces across the portfolio. Our CPI rate increases are about 25% of the overall portfolio. And depending on how CPI trends month-over-month and quarter-over-quarter, that's going to drive exactly what that number works out to for the full year. And then in Florida, we have two to three year typically long term agreements. And as I mentioned that process earlier, we may land at a view towards two or three year rate increases for an HOA, and that may lag the CPI expectations. So that could be easily be in the 4%, 4.5% range. Over time, those will trend toward market including the recognition of CPIs impacts. And just as a reminder, also, in Florida, when current homeowner sells to a new homeowner, that new homeowner will pay the market rate upon renewal of that lease on an anniversary date. That kind of touches on all the buckets. I hope that answers your question.

Maybe just a related follow up on that is, as you have your conversations with your customers or your tenants, are they looking to maybe push back certain capital projects in order to keep kind of rent growth, lower in the near term, given that the rent increases or rent increases are higher than usual with the expectation that maybe some of these projects are done in future years? And that would kind of that would raise rent rents in future years?

I mean, I think what we're seeing, Michael is that the in-place residents where there's been some mark-to-market. So some of those rent increases have already incurred and we've seen that about 11% for the year, so that that type of increase, and new customers coming in very willing to pay that we do have the discussion about what the capital needs of the property are. But I think people are cognizant of what's happening with CPI. And I think the discussions have been going well, very well so far, being able to talk about where we should spend capital and in what the rent increases should be.

Got it. And then for my second question, the gap between the expected 2023 MH rent increase of 6.2% to 6.6% and RV annual rent increase of 7.6% to 8% is 140 basis points. Last year, at this time, the gap was 30 basis points. So what's kind of the difference in the pricing power that you're seeing on the RV side relative to MH? And how sustainable is that?

I mean, I think we see real demand on the RV side specifically on the annual people wanting to spend, spend the season or spend, spend the come down and they have to stay with us on an annual basis. So that's really driving it. It's really market forces. We look at our market survey. We look around and see what's happening in and around our communities. And that's what's formed that that rent increase.

Thank you very much.

One moment for our next question. Our next question comes from Nick Joseph with Citi. Your line is open.

Thank you. It's obviously a quiet quarter for transaction volume this most recent quarter. But what are you seeing more broadly across the transaction market as cap rates adjust the higher interest rate in capital costs?

Yes, Good morning Nick. I think in the quarter you're right, we required relatively quiet we purchased two pieces of vacant land that was adjacent to one of our manufactured home communities in Florida, and then one near one of our manufactured home communities in Chicago. Those are, those are properties that we put under contract over the last year, and then we intend to develop over the next couple of years. So that's kind of what happened in the quarter. And then relative to just the pipeline and what we're seeing is similar to what we've seen in the past, but not a real notable change in cap rates. But, I think that tends to take a little bit of time, owners are seeing less buyers, but they still have rarely, very many interested owners and potential owners that are interested in buying their properties. So brokers do a great job of marketing deals. I think fear of continued rising interest rates may present an incentive, really for owners to become sellers, especially when there's a refinancing term on the horizon. So I think some of those opportunities may come up in the near future.

Thank you. That's helpful. And then just on the insurance recoveries. I recognize it's very hard to forecast but just historically that with other storms, what was the timing, and percentage recovery associated with the damages or the clean-up?

Yes, Nick our best. Our best example on the recovery is looking back to Hurricane Irma from 2017. And even the experience we have then, when we think about the business interruption, which is a key component, as I mentioned in my remarks that it’s recognized upon receipt, the storm occurred in earlier in September of 2017. And it was the first quarter of 2018 when we started to recognize those business interruption proceeds. We continue to, it was about an 18-month timeframe that we collected those proceeds on a quarterly basis.

Thank you.

Thank you. One moment for our next question. Our next question comes from John Kim with BMO. Your line is open.

Thank you. Good morning. The lowering of the guidance for the year came as a negative surprise to the market just given a couple weeks ago, on your assessment of -- and you stated that the hurricane will not significantly impact the results of your operations. I'm just wondering what happened in the last couple of weeks? Was the assessment worse than originally expected? Or are you basically saying that there's other factors of the reduction of guidance besides hurricane Ian?

I think John, potentially, we have a timing issue. I think there's an expectation on our side that we'll have recovery of insurance proceeds to offset the impact. So overall, when you think about our financial condition, our view is that there's not a significant impact. There is however, a timing impact in the fourth quarter as it relates to the expense that we incur, or the experience that we'll have relative to closure of certain properties. And then as I just discussed the timing of the receipt of business interruption process.

Okay. And also, on the fourth quarter inside guidance, how much of the reduction is due to that timing impact versus rising interest rates? You got the transient RV that came in lower than expected. What else the utility costs. I'm just wondering how much of that utility expense is a onetime increase in rate versus something that normalizes over time, but what were the -- what was the component of the other factors besides Hurricane Ian, on fourth quarter guidance?

Sure. No, appreciate it. I mean, there's a lot that goes into a forecast model. And every quarter, our team conducts a review to identify potential changes to the prior model. It's almost like we prepare a mini budget every three months. And as I think about our third quarter results, and the potential influence they may have had on assumptions we might have made for the fourth quarter and a but for the hurricane, in the hypothetical we're talking about, I'll say we would have had adjustments to revenues and expenses, likely both of them increasing. And that likely would have resulted in a potential decrease in our core NOI compared to prior guidance. I'll also say, though, that we would have adjusted our expectations for other line items. And based on trends we saw in the quarter and that we've seen year-to-date, it may have offset the decline in NOI. And all of this is hypothetical because of the impact of the hurricane. At the end of the day based on our model, we find ourselves in a situation where the potential impact of the hurricane is the equivalent to the reduction in our guidance for the rest of the year.

So just to clarify, and I realize there's a lot of moving parts, is the majority of the reduction due to Hurricane Ian, or can you ballpark what percentage that is?

The reduction when I think about, I think about the potential for lost occupancy. When I think about the closure of the properties and the impact of those loss revenues, the potential for us, too, as I, as I said during my opening remarks, after [Indiscernible] incur bad debt and so forth. All of that rolled together is the is the reduction to our guidance.

The written right. So John, the reduction to FFO is because of the hurricane.

It's very helpful. Thank you.

One moment for our next question. Our next question comes from Samir Khanal with Evercore ISI. Your line is open.

Hey, good morning, everybody. Marguerite, Paul, my question is around expense growth. I guess putting the hurricane aside, how should we think about expense growth, maybe into next year. I mean, you've guided to 57, you're clearly above that. That sort of range for the year, I'm trying to we're trying to figure out how sticky are these higher expenses as we think about 23 next year?

So year-to-date, our expense growth is 8.3% in the core. I think the reported increase in CPI averaged 8.3% for both the quarter and year-to-date. So all in, we're essentially in line with CPI. Now utilities, payroll, and repairs and maintenance are about two thirds of our expenses. Those categories, excuse me have increased about 10.5% in the year-to-date period. And it's really utilities and repairs and maintenance that have been elevated payroll essentially has been in line with CPI. For utility expense, it's almost 30% of our core expenses. And electric expense is the largest component of our utilities represents somewhere between 35% and 40% of the total annual year-to-date electric expenses increased 16% driven by outsize rate. The increases that we've seen are in line with increases in the electric component of CPI. The September CPI leads showed electricity, year-over-year was up more than 15%. As I mentioned in my remarks, these rate increases occur suddenly, little or most often no advance notice before the bill arrives. Well, you have experienced rate volatility. And in the past, certainly in our history, we've not experienced such rapid and significant increases in utility expenses we're experiencing this year. Overall, do recover somewhere in the 44% to 45% range in terms of expenses on an annual basis, you'll see some fluctuation quarter-to-quarter because the RV properties don't recover the utilities from transient customers. The long term strategy that we have to mitigate utility costs is to unbundle and charge residents and guests for their usage. But that is challenging with the transient RV guests. And then with respect to R&M notes about 15% of our core expenses. Included in this expense category are expenses related to unplanned events, local storms, we have wind and rain events that result in clean-up costs or other maintenance that can be significant. But over time, they don't rise to the level of uninsured loss. As we look at it, we kind of see that representing about 5% of our R&M expense on an annual basis. Long term mitigation plans which affected those expenses include investment in infrastructure, that reduces our exposure to costs, following those significant rain events, as well as landscaping, tree trimming, and so forth to mitigate the wind related damage.

And I think Samir as you've seen in 2022, we've really we've provided additional detail about the composition of our core expenses and Paul has gone through a lot of that, which we think is very helpful to create an earnings model so that you can see the components of the expenses.

Right. No, I understand that. We're just finding it a little bit difficult to kind of model expenses, right. I mean, you started the year with four eight. I think it was your guidance and then you get to five seven and now you're tracking close to 8% So we're just trying to figure out for 23, how to kind of model that. And I guess as a follow up, I mean, how are you thinking about electricity rates in the next year? I mean, as we think about is this another year where you can remodel another 7% to 8% for next year and that's kind of the reason for the question.

I mean, I think it's early for us to talk too much about the 2023. Our call in January, where we'll certainly talk about our budget. But, the pressures in the areas where our properties are located, and that we've highlighted for the Northeast, in the south, in particular, the spot pricing for natural gas that drives electric energy prices continue to be elevated. I think that we're watching closely the monthly CPI reports, the energy component particularly electric and natural gas. And I think that that'll be a key factor as we develop our budgets for 2023. Again, given how quickly and significantly these rates have changed, we are subject to that volatility on a go-forward basis.

Got it. And I guess as a follow-up for me. When I look at your FFO guide, you did come down $0.06 at the midpoint, and then you talked about sort of the primary reason was hurricane. So the impact on the hurricane, but -- which is about, I think, $12 million hit, right? So if you think about maybe provide some guidance around Hurricane Irma. Were you able to get -- how much of that impact of Hurricane Irma did you fully recover? I mean was it 90%, was it 80%? Was -- I mean how much do you expect to recover of sort of the $12 million over time?

Yes. If you walk through our public filings, I think that you'll see -- I think that you'll see total, when you think about the overall claim, you'll see a total estimate in the range of about $35 million to $36 million, and the recovery that we noted is around $31 million. Now in terms of the P&L impact, I'm talking cash spend and recovery. In terms of the P&L impact, the lion's share of the -- by lion's share, I mean, 95-ish plus percent of the expense that we recognized was recovered.

Got it. That’s very helpful. Thank you.

One moment for our next question. Our next question comes from Brad Heffern with RBC. Your line is open

Hey good morning, everyone. Thanks. You talked about the timing mismatch from the hurricane. So just to clarify, once the business interruption insurance kicks in, would you expect any meaningful on-going financial impact?

Well, I guess the way I'll answer that, Brad, is the business interruption will likely be recovered on a lag. And so it won't be -- it won't necessarily be a perfect match in the time period that we receive it. But over time, the expectation is would be to recover proceeds equivalent to the law.

But the focus is on getting the properties back up and running so that we don't rely on the business interruption insurance. That's the plan.

Yes. Okay. Okay. Got it. And then, I guess broadly, are you seeing any signs of stress in the portfolio? You can kind of take that where you want to take it, but I'm sort of thinking about things like bad debt, maybe unusual levels of cancellations on the RV side, anything like that?

No, we're seeing -- I mean as we showed for the rate increases, I mean, that's a very recent finding in terms of the rent increases that we just sent out on the annual RV side and then the MH side. So real strength there, real demand from a home sale perspective. So I think that's been very positive. And as we're heading into our season now continued demand for people to come down and stay with us on a seasonal basis, our first quarter is the big -- is our biggest part of our seasonal business happens in the first quarter, and we're seeing strength there. We do watch what you're talking about there, look for signs of weakness. But overall, we feel very comfortable -- we continue to have a waiting list for homes for people wanting to buy our homes. It's just difficult to get the homes as quickly as people want to buy them. So overall, feeling very positive about the demand characteristics for our portfolio.

Okay. Thank you.

One moment for our next question. Our next question comes from Joshua Dennerlein with Bank of America. Your line is open.

Hey Marguerite, hey Paul, hey Patrick. Hope you guys are doing well. I guess I was just curious on the expense side. Like is there anything you can do to kind of control the expenses in the near term, I guess, in particular maybe on the labor front? I know some of the resi peers have kind of implemented kind of changes during the COVID and post COVID to kind of help on that front. Anything that you can do on that platform?

Yes. I think Josh; we have talked about some technology initiatives. I will say that the decentralized nature of some of our operations hasn't resulted in some of the efficiencies compared to maybe the resi peers that have shared service centers and are able to automate a function and reduce labor costs as a result because ours is spread across all of our properties in terms of their responsibility for things like administration, oversight of expenses and so on. But I do think that we've implemented with a focus on improving the resident and guest experience. And over time, as we're able to leverage that, I think that you should see some savings in our overall cost structure.

And then we're also focused on that utility recovery piece of the business. So maximizing that and making certain that we're doing whatever we can from a submarine standpoint and from just a billing standpoint to collect that revenue, which will offset the expense on the utility side.

Is there any way on like the utility side to like put a surcharge on when you like to see the right volatility spiking, like just to try to get it like more near term?

Right. There's regulations around that, around what you can and cannot charge and what it is called. But we do have -- where we can, we have a sub-meter and we read the sub-meter and then we charge the appropriate rate where possible. There's always the ability here within the transient revenue, you can get increased rates to kind of handle some of that increased expense that you have on the utility side.

What about -- have you thought about hedging utilities at all just to kind of at least smooth it out, so it's not like fake spice and swings or I guess too expensive?

I guess, our focus has been more on deregulated markets where we can enter into contracts to fix those costs. That's certainly relevant in Texas. It is relevant in the Northeast, although it has been somewhat challenging to find opportunities that have worked in terms of the economics.

Thanks guys.

One moment for our next question. Our next question comes from Robin Lu [ph] with Green Street. Your line is open.

Hi, morning. I just want to ask about the MH rent increases again. So based on current trends, do you expect the next half or the next batch of MH residents to see rate increases above or below the mid-6% average that you disclosed in the stock?

Yes, it's Patrick. I would expect it's going to continue to trend in a similar fashion. Just one point I'll make with respect to the next batch. [Technical difficulty] I addressed a little earlier is that a new resident coming in to the extent that there is a gap to market as the incoming market rate, and that has been trending 10% plus year-over-year.

So just to, I guess, some context around that. So it's 11%, what would that have been, say, a few months ago?

It's pretty much been 11% throughout the year, what we've seen on the mark-to-market.

So Robin, we've seen -- we have about 10% turnover. So we've seen an uptick of about 100 basis point pickup related to those market increases.

Got it. So just wanted to shift towards the transaction market. So has just seen any widening cap rates in the seasonal and transient RV properties relative to annual RVs in recent months?

There haven't been -- I'd say, Robin, there haven't been a lot of transactions that have happened. So it's difficult to kind of pull together those data points. In general, I would say that I've always said that transient RV parks should trade at a higher cap rate just because of the volatility inside of that income stream. But I really don't have anything to point to for transactions that have happened over the past, call it, 6 months or even year-to-date relative to that.

Great. Thank you.

Thank you Robin.

One moment for our next question. Our next question comes from Anthony Powell with Barclays. Your line is open.

Hi, good morning. I've a question on home sales. I think you mentioned that it was hard to get homes to sell to the prospective new customers. Could you maybe talk about the availability of the homes to sell and maybe just trends in that market, given what you're seeing elsewhere in the for-sale residential market across the country?

Sure, it's Patrick. What we've seen, and this has been pretty consistent in the post-COVID new normal is we have been able to do to acquire homes from manufacturers to maintain occupancy growth in that, call it, 30 to 60 a quarter range on a net basis. And we could be growing our occupancy more than that if we could get more homes. There have been challenges on the manufacturer side with respect to labor and supply chain as we've seen in many other industries. So I would expect that the pace that we're moving at this point is going to continue until there are some structural ways or some structural shifts to pick up the volume of manufacturing.

Got it. Thanks and maybe one more, just maybe on the guidance on the FFO numbers for this year next. When you provide guidance for full year 2023 in January, will you be including prospective BI insurance receipts in that guidance? Or is that something that you would kind of let happen and report as it comes in?

It's a little early to determine what we would be including. We will certainly be receiving proceeds in 2023, but we'll probably have a better update certainly a NAREIT and then certainly as we head into the first quarter in the January call.

Great. Thank you.

Thank you Anthony.

One moment for our next question. Our next question comes from Mason [indiscernible] with R.W. Baird. Your line is open.

Hey good morning everyone. Thanks for taking my question. Have you seen any change to seasonal bookings for next year following Hurricane Ian? I guess do you expect guests to be more unsure of how the surrounding area will be doing with all the rebuilding?

Yes. We've seen an increase in seasonal reservations in general, but that's -- what we generally see is the storm passes hurricane season, we get out of hurricane season, which is November, we get through hurricane season, the phones start ringing, it gets really cold in Chicago, gets really cold in New York, and people tend to forget about the hurricane and they come on down. Obviously, if there's impacted areas where they are no longer able to stay because the hurricane was impacted -- that has impacted that particular area specifically. They tend to go to another area just focused on getting out of the winter, the cold winter month and staying with us in Florida, Arizona, where the sun is going to be there for January, February and March.

That’s all from me. Thank you.

One moment for our next question. Our next question comes from John Kim with BMO. Your line is open.

Thanks for taking the follow up. You had a footnote about not taking an impairment charge this quarter, but you reduced the carrying value by $3.7 million. I know that's not a huge amount, but I thought those 2 items were just anonymous. So I was wondering if you could clarify that.

Yes. I think maybe I might fall into category of learning too much or knowing too much, John, but let me just walk you through. So our accounting policy for impairment identifies natural disasters as a potential indicator of impairment. And as a result, we took a look at the impacted properties and there's an exercise we have to test the recoverability of net book value through estimated future cash flows. All of those tests show the net book values are recoverable. So from that perspective, there was no impairment of the long-lived assets based on recoverability. Then there's a second part to the impairment analysis, which we conducted over the past 20 days, an extensive review of the condition of the properties that were impacted by the hurricane. Our internal ops and asset management teams, third parties were visiting the properties and during that review, the team did identify assets that suffered significant damage from the storm. Based on their informed opinions of the extent of the damage and any other relevant information that we currently have, we reduced the carrying value of those damaged assets to mask the current condition. And that is the expense, the impairment effectively that you see from the damage to the assets on that line item in our income statements.

And are those damages on homes that you had planned to sell or on the new rent? Or is it wider than that?

Yes. There is a portion of the assets that were damaged are homes that we held for sale and rent in our properties.

So we're in the process of -- we're in the process of repairing those homes and getting them ready for sale and for rental, if rental is appropriate.

Okay. My second question is there's been some estimates out there on homeowner insurance in Florida increasing by as much as 50% next year. And I'm wondering how that impacts ELS? Do you expect to have a similar increase in your insurance in Florida? Or are you insured more on an entity level? And if you could remind us how your tenants are ensured if they typically have homeowner insurance?

Sure. So why don't I take the last half of that first, just in terms of the homeowners. I think I mentioned in my opening remarks that 96% of our residents are homeowners, they own the home versus renting. For the vast majority of that group, they pay for their homes with cash, and therefore, they have equity and pride of ownership in those homes. We don't track or require insurance for our homeowners. We have seen in prior storms, a lot of insurance adjustors come out, activity at the properties as they work through work through their claim. But there's -- right now, as you drive through the properties over the last couple of weeks and seeing an awful lot of people out there are repairing their homes and going through the normal things that they go through as the storm passes. With respect to our insurance, our current programs expire in April of next year. Lloyd's of London has led our MH-RV property insurance program since 2009. We think we have a really mutually beneficial relationship. Some markets will assess the impact of the hurricane and other loss events. And the -- although I think the 2023 market, which is a long way off, April is a long way, a lot of things can happen, it will depend on the 2022 hurricane season. But our real experience is that the underwriters, they assess the risks by the portfolio and each insured portfolio composition and then the loss experience, and that kind of determines their pricing for 2023. Following Hurricane Irma, the markets adjusted and we renewed our program, and it wasn't an issue. So more to come on that as we start the New Year.

Do you recall what the increase was after Irma?

Yes. We've seen 20% increases in our insurance expense. When you look back over the past 5 years since Irma, it's been about a 20% increase per year.

Got it. Great.

Thank you John.

Since we have no more questions on the line, at this time, I'd like to turn the call back over to Marguerite Nader for closing comments.

Thank you for joining us today. We look forward to updating you for joining us on -- next call. Take care.

Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.